Good morning. My name is Chantel, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tidewater Q2 2022 Earnings Conference Call. As a reminder, today's conference call is being recorded. [Operator Instructions] West Gotcher, Vice President of Finance and Investor Relations, you may begin your conference.

Thank you, Chantel. Good morning, everyone, and welcome to Tidewater's earnings conference call for the 3 and 6 months ended June 30, 2022. I'm joined on the call this morning by our President and CEO, Quintin Kneen, our Chief Financial Officer, Sam Rubio; our General Counsel and Corporate Secretary, Daniel Hudson; and our Vice President of Sales and Marketing, Piers Middleton. During today's call, we'll make certain statements that are forward-looking and referring to our plans and expectations. There are risks and uncertainties and other factors that may cause the company's actual performance to be materially different from that stated or implied by any comment that we make during today's conference call. Please refer to our most recent Form 10-K and 10-Q for additional details on these factors. These documents are available on our website at tdw.com or through the SEC at sec.gov. Information presented on this call speaks only as of today, August 5, 2022. Therefore, you're advised that any time-sensitive information may no longer be accurate at the time of any replay. Also during the call, we'll present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures can be found on our website at tdw.com and is included in yesterday's press release. And now with that, I'll turn the call over to Quintin.

Thank you, West. Good morning, everyone, and welcome to the Second Quarter 2022 Tidewater Earnings Conference Call. I'm pleased to say that the second quarter continued a pace of rapid improvement in the offshore vessel market and more importantly, marked an inflection point in the market that we have been anticipating for some time now. We've talked about momentum building in the business. The second quarter marked the tipping point in vessel supply and demand dynamics, and it marked a significant step-up in our operational and financial results. I'll provide more color on some of our regions and vessel classes. But in short, the most important indicator in the strength of our business, day rate, increased by nearly $1,900 per day sequentially. With 172 working vessels, that's a big move for 1 quarter. You may recall that we've discussed an increase over an entire year during a typical up cycle, up about $1,500 per day. This sequential quarterly uplift is the most indicative signal as to the step change we're experiencing in the market today. During the second quarter, we closed on the acquisition of Swire Pacific Offshore, which you may hear us referred to as SPO. I'm pleased to say that the integration of the acquisition is going well with some early successes realized, and that the SPO fleet contributed $43.2 million of revenue during the second quarter post-closing of the transaction, and that it generated vessel-level cash margins in line with our consolidated vessel level cash margin of 38%. For the quarter, the legacy SPO G&A totaled approximately $3.9 million, which would be $5.2 million on a full quarter run rate. Total G&A burden for legacy SPO in 2021 was about $35 million. We are confident that we will achieve our targeted goal of $20 million in G&A…

Thank you, Quintin, and good morning, everyone. Last quarter, we talked about some of the supply issues we are seeing that are affecting the global OSV market today and why with our modern larger fleet of PSVs and AHTSs, we are well placed to take advantage of this continuing upturn in the market. These larger vessel classes are where we believe the supply-demand balance is almost in parity. And of those vessels that are still stacked, they have been for over 5 years and/or over 20 years old, and in our view, we'll find it difficult, if not impossible, to come back into the market, especially as we're still seeing limited dry docking space globally and significant long lead times for major equipment items, which we believe will further exacerbate the already tight supply-demand balance in these larger vessel classes. This quarter, I would like to focus more on the demand side globally and how that is affecting, obviously, day rates for the first half of 2022. Overall, the market remains very positive. In total, we see full year projected CapEx commitments for 2022 of $86 billion, which is up around 20% on the full year average, which bodes well for future years. Rig demand continues to improve with utilization levels across the floaters and jack-ups, almost touching 85% levels and term day rates for ultra-deepwater units almost at $450,000 per day, all of which drive the basic fundamentals of the OSV space and parlays nicely into our own fleet. Specifically on the OSV side, we've started to see the increase in demand and shortness and supply impact rates positively on the upside, with Clarksons Research reporting global 1-year time charter rates for the largest PSVs at $22,000 per day levels compared to $15,000 per day levels in 2021 and…

Thank you, Piers, and good morning, everyone. Now I would like to take you through our financial results and discuss some key points that make up these results. My discussion will focus primarily on quarter-to-quarter results comparing the second quarter of 2022 to the first quarter of 2022. As noted on our press release filed yesterday, we reported a net loss of $25.6 million or $0.61 per share. From an operational perspective, we showed meaningful revenue improvement quarter-over-quarter. Our revenue for the second quarter of 2022 was $163.4 million. This is $58 million or approximately 55% increase from the first quarter of 2022. The sequential revenue uplift benefited from the addition of the SPO vessels from April 22 of this year, which contributed $43.2 million of revenue during the quarter. Utilization was roughly flat sequentially with active utilization of 82.5%. However, day rates improved 17% to $12,544 per day in the second quarter from $10,687 per day in the first quarter. Overall, gross margin for Q2 increased nicely to 38%, up from 35% in Q1. Vessel operating cost for the quarter was $100.3 million, an increase of $31.7 million from Q1, principally driven by the addition of the SPO vessels. SPO vessel operating costs totaled $26.7 million for the remainder of the quarter post closing of the transaction. Vessel operating cost per market a day in Q2 was approximately $6,300 per day. That may increase somewhat in Q3 until we begin realizing our synergies beginning in the second half of this year and accelerating through the first half of next year, at which time we would anticipate our operating cost per market a day to decrease to close to $6,000 per day. We sold 4 vessels during the second quarter for net proceeds of $3.5 million and recorded a combined…

Thank you, Sam. In closing, I would like to remark on what we see for the remainder of 2022 and into 2023. On last quarter's call, I expressed our confidence that the back half of 2022 would bring a meaningful uplift compared to the first half of the year. On the heels of a strong second quarter, our confidence in the second half of 2022 has not changed. We remain confident in the continued progression of day rates and utilization improvements throughout the remainder of the year. For the remainder of 2022, our revenue backlog stands at $327 million, representing fleet contracted coverage of approximately 77%. Contract coverage is fairly evenly led across all of our vessel classes with our largest class of PSVs having the most exposure to the spot market opportunities. As we move into 2023, revenue backlog stands right at $400 million, representing fleet contracted coverage of approximately 52%. Our largest class of PSVs have current contract coverage in 2023 of about 50%, representing a considerable opportunity to continue to deliver our largest class of vessels in a market environment currently experiencing substantial rate improvements. To put the strength of our day rate increase in perspective, during the second quarter, 24 of our vessels entered new contracts of various durations that will ultimately provide a nearly 50% aggregate uplift in day rates as compared to the previous aggregate contracted day rates. This compares to the 16 vessels that entered into new contracts during the first quarter that realized just over 20% of pricing improvement. While there are some mix issues, it's worth noting that for our largest class of PSVs, pricing on new contracts entered into during the second quarter was in excess of 80% uplift as compared to their prior contracts. Candidly, the market is moving faster than we anticipated. And with that, Chantel, we will open it up for questions.

[Operator Instructions] Our first question comes from Hans Lund with Clarksons.

Just first question from my side, just to clarify, you said that the average day rate for the entire fleet was around $17,000 per day, while it says around $12,500 in the report. Can you just clarify those numbers?

Yes. I think they are rollover contracts. So, the contracts had rolled over during the quarter. We're just over $17,000, but they're all-in rate for all...

Okay. Perfect. Speaking of day rates, we've talked about this in the past. I mean, even this solid quarter has -- where can we kind of -- or do you have a view of where you expect to see the average day rates ending up at the end 2022?

Well, we don't have a public view that we're going to express on that at this point. But clearly, we're excited about the ramp-up that we're seeing. And we definitely have exposure to turn over our large class of our vessels, especially the larger vessels as we move into end of '22 and into '23.

Okay. And regarding your balance sheet with, in my opinion, [indiscernible] leverage and sound cash position. Has your view changed on potentially adding more gearing to your balance sheet? How should you kind of up your cash position going forward are it paying out dividends more relevant now than it was before? Are you looking at investment opportunities? Can you comment around that, please?

Yes. Yes. Sure. Listen, I've made no comments about -- I believe businesses are made to build cash and return that cash to shareholders. As it relates to our -- I agree, we are underlevered for a capital-intensive company. However, we are a capital-intensive company coming out of a severe contraction in our industry and we are still preserving what you might call dry powder for additional accretive acquisitions, but also just making sure that we have the right liquidity until this industry is firmly established in more of a kind of mid- to up cycle. So appreciate that we're underleveraged. Look for reasons to deploy that capital into constructive acquisitions to the extent that that's appropriate for us strategically, have no issue returning money to shareholders and I'm excited about the opportunity to do that when the time is right.

Our next question comes from Patrick John Fitzgerald with Baird.

I wanted to ask about how much will reactivations from competitors impact the kind of supply side for OSVs in going forward. I get that the spot market is tight right now, it sounds like, but is there a lot of spare capacity that can be reactivated relatively cheap that's going to put a hindrance on how much day rates can go up in the future?

Well, I'll give a start to answering the question, then I'm going to hand over to Piers to see if he's got any on-the-ground tactical perspective. But the economics are such that a vessel that's been laid up. As long as the vessels that remain in layup today, have been laid up, it'd mean that I think that this is very unlikely that any high-end vessel gets reactivated. We're definitely seeing reactivations on the low end, and that market was generally more oversupplied than the high-end boats when Piers was referencing a lot of tenders in the Middle East front. And those are generally low to medium stacked vessels. And as so we're starting to see those large tenders from Saudi Aramco and others absorbing vessels out of Asia, which have been in layup since they delivered. And so that certainly will impact the market. on those low-end vessels. But even though it will impact the market, we're still seeing some reasonable day rate increases even on those low-end boats. And so -- but let me get it over to Piers and see if he wants to add anything.

Yes. Thanks, Quintin Kneen. No, I mean I think just to reiterate on the larger sizes of our PSVs, this was 700 square meter plus size, we see very single digits of vessels that possibly could come back into the market. And that's similar to the large [indiscernible] as well for the sort of 16,000 BHP class as well. And then really just to Quintin's point, yes, there is potential of some of the smaller classes coming back, but a lot of those vessels when you really go into the numbers, which I don't hear those vessels have been stacked for 5 years. There's very long lead items to get parts and maintenance and things like that. So maybe some of them will come back. But it's going to take time just with the supply crunch we're seeing in the market for just getting spares and reactivations in place anyway. So there's not too much of a concern on the lower end vessels either and certainly not really 1 on the large classes.

Okay. So following the offshore rig industry, see a lot of contracts that have been signed recently, but these are rigs that are not actually working yet. So I would expect the demand side to continue to improve. So I mean, is that your expectation as well? Yes. And then I guess, just kind of your thoughts on, I mean if that's kind of the backdrop, where could we see day rates in '23?

Yes. So I agree with you on the demand side. Just to encapsulate what I see happening on the demand side over the last couple of years, what we saw in 2019 was an increase in oil price, which got -- which prompted people to catch up on maintenance. Oil price starts moving up, people want to start producing more. And so their first reaction is to go out to their existing production facilities and fix things that perhaps have been broken for a while and find ways to enhance production and to get more barrels out of each of the individual units. And so we saw that beginning at the end of 2019. We saw it ramp up in -- sorry, we saw it fall off considerably in the pandemic. And then we started to see the same dynamic come back at the end of '21 and into the beginning of '22. And so what we've really seen so far in our demand for vessels has been catching up on deferred maintenance and looking for ways to enhance production. The rigs that are now going back to work as well as the offshore wind farms that are being constructed are adding another layer of demand, and we're going to see that come in '23. I don't want to speculate where rates are going to go in '23. I will tell you that in prior peak cycles, average day rates for the Tidewater fleet at the time was right about $20,000 a day, okay? The fleet at that time was not as high graded as the fleet is today. We've done a lot of acquisitions with -- obviously, through buying vessels, but we also did the GulfMark deal, we did the SPO deal. And at the same time, we've been…

Great. And then you provided a lot of numbers, but just kind of just for clarification, what's like a good run rate G&A per quarter once synergies are realized?

Yes. Probably, Patrick, I would see about $20,000 per day -- day quarter. .

$20 million per quarter.

I'm sorry, $20 million.

Yes.

We have reached the end of the question-and-answer session. I will now turn the call back over to Quintin Kneen, CEO, for closing remarks.

All right. Well, thank you, Chantel, and we look forward to updating everybody again in November. Goodbye.

This concludes today's conference call. You may now disconnect.